In general, investing has some simple principles that investors follow to achieve success. But the key to success is not only to do something, but also not to do something. Beyond that, our emotions affect the whole process. While everyone knows to “buy low, sell high,” our personalities often lead us to buy high and sell low.
So the key is to develop a set of “golden rules” that will help guide you through tough times. Anyone can make money when the market goes up. But when the market is in turmoil, investors who succeed in obtaining substantial returns often have viable long-term investment plans.
The following 10 investment golden rules can help investors to achieve greater success and hope to obtain higher returns.
Rule 1: Never lose money
The first rule comes from a timeless piece of advice from legendary investor Warren Buffett: “Number one, never lose money; number two, never forget number one.” The Oracle of Omaha’s advice highlights avoiding portfolio mishaps Importance of losses. The more money you put into your portfolio, the more money you can earn from it. A loss can affect your future profitability.
Of course, not losing money is easier said than done. The real meaning of Buffett’s investment principles is not to be intoxicated by the potential returns of an investment, but also to pay attention to its downside risks. If you’re taking a lot of risk and not getting enough in return, it may not be worth investing in. Buffett advises investors to first pay attention to downside risks.
Stock volatility is based on the profitability of global businesses. As earnings grow, so do stock prices, at least the long-term trend is upward. But the opposite is true for cryptocurrencies. Cryptocurrencies typically do not have an earnings or hard asset base to support their valuations. That said, cryptocurrencies could end up being worthless, a risk Buffett would never want to take.
Rule 2: Think Like a Business Owner
“Think like a business owner,” said Chris Graff, co-chief investment officer at RMB Capital. “Remember, you’re investing in a business, not just its stock.”
While many investors view investing in stocks as a gamble, stocks are backed by actual businesses. Stocks represent fractional ownership of a corresponding business, and over time, as the business performs better or worse, its shares fluctuate in line with changes in profitability.
Christopher Mitzer, chief executive of Vivaris Capital in La Jolla, California, said: “When investing, pay attention to what is the motivation for investing. Are you really investing or are you gambling? Investing requires analyzing fundamentals and evaluating value. Assess and predict the future performance of the business.”
“Ensure that the business has a strong management team that is aligned with the interests of shareholders, and that the company has a solid financial position and a strong competitive position,” Graff said.
Rule 3: Follow established procedures
Sam Handel, portfolio manager at Kepos Capital, pointed out: “The best investors have developed processes that can be executed continuously and successfully through multiple market cycles. Even when facing short-term challenges that may make you doubt yourself Don’t stray from tried and true processes.
One of the best investment strategies for investors is the long-term buy-and-hold strategy. For example, you can regularly buy stock funds in your 401(k) and hold them for decades. But whenever the market fluctuates, investors can easily deviate from their predetermined plans due to temporary losses. Do not do this.
Rule 4: Buy when everyone is panicking
When the market falls, investors usually choose to sell, or no longer pay attention to market fluctuations. But that’s when there is often a flood of investment options at the right price. In fact, the stock market is the only market where everyone is too scared to buy when things are selling cheap. Buffett once famously said: “Be greedy when others are panicky, and panic when others are greedy.”
If you’re a 401(k) investor, the good news is that once you open your account, you just keep buying, nothing else. This structure keeps your emotions out of the way. You’ll be buying the stock when its price is falling, thereby gaining higher long-term value.
Investors who continued to buy during the 2020 stock market decline and experienced the stock market rally in 2021 may also apply to future down cycles.
Rule 5: Observe Investment Discipline
The important thing is that investors should keep saving, even if they are only able to save a small amount, in tough times as well as in good times. By continuing to invest on a regular basis, you can develop the habit of living within your means and building up an asset in your portfolio even over time.
A 401(k) is an ideal vehicle for maintaining this investment discipline because it automatically deducts money from your paycheck without requiring you to make a decision. Picking your investments wisely is just as important—here’s how to choose your 401(k) investments.
Rule 6: Stay Diversified in Your Portfolio
Portfolio diversification is essential to reduce risk. It’s not safe to have just one or two stocks in a portfolio, no matter how well they perform. Therefore, experts recommend building a diversified investment portfolio.
Mindy Yu, former investment director at Betterment, said: “When investing, there is an investment strategy that must be kept in mind at all times, and that is diversification. Diversification can help you better withstand the ups and downs of the stock market.”
The good news is that diversification is easy to achieve. Investing in an S&P 500 index fund provides direct portfolio diversification. The fund holds hundreds of investments in top U.S. companies. If you want further diversification, you can add other options like bond funds or real estate funds, which perform differently in different economic environments.
Rule 7: Avoid Predicting Market Timing
Experts often advise clients against trying to time the market, that is, trying to buy or sell at the right time as advertised in movies and TV shows. Instead, they often quote a famous saying: “Time in the market is more important than market timing.” This means that you should stick to investing to get good returns and avoid frequent entry and exit of the market.
Veronica Willis, an investment strategist at the Wells Fargo Investment Institute, advises: “The best and worst days for investment performance are often adjacent, and may occur when the market is most volatile, in a bear market, or when the economy In a recession. It takes expert judgment to get in the market one day, get out the next day, and re-enter the next day.”
Experts generally recommend regular buying using the dollar cost averaging strategy.
Rule 8: Fully understand your investment objects
“Don’t invest in something you don’t understand and make sure the risks are clearly disclosed to you before investing,” said Chris Rowley, founder and chief executive of Harvest Returns, a fintech platform focused on agricultural investments.
No matter what product you invest in, understand how it works. If you’re buying a stock, you need to know why it makes sense to invest in it and when it’s likely to be profitable. If you invest in a fund, you need information about its past performance and costs. If you buy annuity insurance, it is key to understand how an annuity insurance works and what your rights are.
Rule 9: Review Your Investment Plan Regularly
Having a solid investment plan and making only minor revisions to it is good investing philosophy, and it’s wise to review your investment plan periodically to see if it still suits your needs. You can review your plan when you check your books for tax purposes.
“But remember, your first financial plan won’t be your last,” says Kevin Driscoll, vice president of investment services at Navy Federal Financial Group in the Pensacola area. You can Analyze your plans and review at least once a year, especially when you reach a major milestone, such as starting a family, moving or changing jobs.”
Rule 10: Stay at the table and set aside an emergency fund
Having an emergency fund set aside is absolutely critical not only to get you through the storm but also to keep you invested for the long term.
Craig Kirschner, president of retirement planning services at Kirsner Wealth Management in Pompano Beach, Florida, advises: “Set aside 5% of your assets in cash, because life is always challenging.” He adds: ” You should have at least six months’ worth of living expenses set aside in a savings account.”
If you have to sell part of your investment when times get tough, it’s probably usually when the value of the investment falls. An emergency fund can help you stay at the investing table longer. Funds that may be needed in the short term (within three years) should be set aside as cash, ideally in a high-yield online savings account or certificate of deposit. Shop around to find the perfect investment.
Summarize
The key to investing wisely is making the right choices and avoiding the wrong ones. It’s important to manage your emotions so you’re motivated to make good choices, even if those choices may make you feel risky or unsafe. (Fortune Chinese website)
This article was originally published on Bankrate.com.
Translated by: Liu Jinlong
Reviewer: Wang Hao
Investing can often be broken down into a few simple rules that investors can follow to be successful. But success can be as much about what to do as it is what not to do. On top of that, our emotions throw a wrench into the whole process. While everyone knows you need to “buy low and sell high,” our temperature often leads us to selling low and buying high.
So it’s key to develop a set of “golden rules” to help guide you through the tough times. Anyone can make money when the market is rising. But when the market gets choppy, investors who succeed and thrive are those who have a long- term plan that works.
Here are 10 golden rules of investing to follow to make you a more successful—and hopefully wealthy—investor.
Rule No. 1: Never lose money
Let’s kick it off with some timeless advice from legendary investor Warren Buffett, who said “Rule No. 1 is never lose money. Rule No. 2 is never forget Rule No. 1.” The Oracle of Omaha’s advice stresses the importance of avoiding loss in your portfolio. When you have more money in your portfolio, you can make more money on it. So, a loss hurts your future earning power.
Of course, it’s easy to say not to lose money. What Buffett’s rule essentially means is don’t become enchanted with an investment’s potential gains, but also look for its downsides. If you don’t get enough upside for the risks you’re taking, the investment may not be worth it. Focus on the downside first, counsels Buffett.
While stocks have been volatile, they’re based on the earning power of global businesses. As earnings rise, so will stocks, at least over time. Contrast that against cryptocurrencies, which usually have no basis—such as earnings or hard assets—to back their valuation. That is, cryptocurrency could ultimately be worth nothing—not the kind of risk that Buffett wants to take.
Rule No. 2: Think like an owner
“Think like an owner,” says Chris Graff, co-chief investment officer at RMB Capital. “Remember that you are investing in businesses, not just stocks.”
While many investors treat stocks like gambling, real businesses stand behind those stocks. Stocks are a fractional ownership interest in a business, and as the business performs well or poorly over time, the company’s stock is likely to follow the direction of its profitability.
“Be aware of your motivation when investing,” says Christopher Mizer, CEO of Vivaris Capital in La Jolla, California. “Are you investing or gambling? Investing involves an analysis of fundamentals, valuation, and an opinion about how the business will perform in the future.”
“Make sure the management team is strong and aligned with the interests of shareholders, and that the company is in a strong financial and competitive position,” says Graff.
Rule No. 3: Stick to your process
“The best investors develop a process that is consistent and successful over many market cycles,” says Sam Hendel, portfolio manager at Kepos Capital. “Don’t deviate from the tried and true, even if there are short-term challenges that cause you to doubt yourself.”
One of the best strategies for investors: a long-term buy-and-hold approach. You can buy stock funds regularly in a 401(k), for example, and then hold on for decades. But it can be easy when the market gets volatile to deviate from your plan because you’re temporarily losing money. Don’t do it.
Rule No. 4: Buy when everyone is fearful
When the market is down, investors often sell or simply quit paying attention to it. But that’s when the bargains are out in drives. It’s true: the stock market is the only market where the goods go on sale and everyone is too afraid to buy . As Buffett has famously said, “Be fearful when others are greedy, and greedy when others are fearful.”
The good news if you’re a 401(k) investor is that once you set up your account you don’t have to do anything else to continue buying in. This structure keeps your emotions out of the game. You’ll continue purchasing stocks when they’re cheaper and offer better long-term values.
Investors who continued to buy throughout the 2020 downturn rode stocks up throughout 2021, and the same will likely apply to future downturns as well.
Rule No. 5: Keep your investing discipline
It’s important that investors continue to save over time, in rough climates and good, even if they can put away only a little. By continuing to invest regularly, you’ll get in the habit of living below your means even as you build up a nest egg of assets in your portfolio over time.
The 401(k) is an ideal vehicle for this discipline, because it takes money from your paycheck automatically without you having to decide to do so. It’s also important to pick your investments skillfully—here’s how to select your 401(k) investments.
Rule No. 6: Stay diversified
Keeping your portfolio diversified is important for reducing risk. Having your portfolio in only one or two stocks is unsafe, no matter how well they’ve performed for you. So experts advise spreading your investments around in a diversified portfolio.
“If I had to choose one strategy to keep in mind when investing, it would be diversification,” says Mindy Yu, former director of investing at Betterment. “Diversification can help you better weather the stock market’s ups and downs.”
The good news: Diversification can be easy to achieve. An investment in a Standard & Poor’s 500 Index fund, which holds hundreds of investments in America’s top companies, provides immediate diversification for a portfolio. If you want to diversify more, you can add a bond fund or other choices such as a real estate fund that may perform differently in various economic climates.
Rule No. 7: Avoid timing the market
Experts routinely advise clients to avoid trying to time the market, that is, trying to buy or sell at the right time, as is popularized in TV and films. Rather, they routinely reference the saying “Time in the market is more important than timing the market.” The idea here is that you need to stay invested to get strong returns and avoid jumping in and out of the market.
And that’s what Veronica Willis, an investment strategy analyst at Wells Fargo Investment Institute recommends: “The best and worst days are typically close together and occur when markets are at their most volatile, during a bear market or economic recession.ld An investor expert precision to be in the market one day, out of the market the next day and back in again the following day.”
Experts typically advise buying regularly to take advantage of dollar-cost averaging.
Rule No. 8: Understand everything you invest in
“Don’t invest in a product you don’t understand and ensure the risks have been clearly disclosed to you before investing,” says Chris Rawley, founder and CEO at Harvest Returns, a fintech marketplace for investing in agriculture.
Whatever you’re investing in, you need to understand how it works. If you’re buying a stock, you need to know why it makes sense to do so and when the stock is likely to profit. If you’re buying a fund , you want to understand its track record and costs, among other things. If you’re buying an annuity, it’s vital to understand how the annuity works and what your rights are.
Rule No. 9: Review your investing plan regularly
While it can be a good idea to set up a solid investing plan and then only tinker with it, it’s advisable to review your plan regularly to see if it still fits your needs. You could do this whenever you check your accounts for tax purposes.
“Remember, though, your first financial plan won’t be your last,” says Kevin Driscoll, vice president of investment services at Navy Federal Financial Group in the Pensacola area. “You can take a look at your plan and should review it at least annually—particularly when you reach milestones like starting a family, moving, or changing jobs.”
Rule No. 10: Stay in the game, have an emergency fund
It’s absolutely vital that you have an emergency fund, not only to tide you over during tough times, but also so that you can stay invested long term.
“Keep 5% of your assets in cash, because challenges happen in life,” says Craig Kirsner, president of retirement planning services at Kirsner Wealth Management in Pompano Beach, Florida. He adds: “It makes sense to have at least six months of expenses in your savings account.”
If you must sell some of your investments during a rough spot, it’s often likely to be when they are down. An emergency fund can help you stay in the investing game longer. Money that you might need in the short term (less than three years ) needs to stay in cash, ideally in a high-yield online savings account or perhaps in a CD. Shop around to get the best deal.
Bottom line
Investing well is about doing the right things as much as it is about avoiding the wrong things. And amid all of that, it’s important to manage your temperature so that you’re able to motivate yourself to do the right things even as they may feel risky or unsafe.
This article was originally published on Bankrate.com.
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